FHA mortgage loans are mortgages guaranteed by the U.S. Government’s Federal Housing Administration. Thanks to this guarantee, FHA mortgage loans are often available to home buyers who do not qualify for “traditional” mortgages.
Authorized FHA lenders may approve borrowers with less-than-perfect credit and with as little as three and a half percent to put down for an FHA mortgage loan. Although FHA loans were designed to serve low- and moderate-income home buyers who would otherwise have trouble getting a conventional mortgage, anybody can apply for an FHA loan up to FHA lending limits (by region).
The Pros and Cons of FHA Mortgage Loans
When reviewing your mortgage options, you will likely encounter many different loan types, each with its own set of pros and cons. An FHA mortgage loan is no exception.
The main advantage to FHA mortgages is the low down payment. Many FHA mortgage loans require as little as three and a half percent, and up to ten and a half percent, down. (Your lender will check your credit to determine your FHA loan eligibility.) If you have better credit than many other home buyers, you may be able to avoid the “up-front” payment altogether.
A second advantage to an FHA mortgage is the monthly payment, which the FHA sets. This allows borrowers with low incomes to afford homes that otherwise would be out of their price range.
The main disadvantage to FHA mortgages is the additional fees charged for the FHA loan guarantee. For example, on a $200,000 loan, an FHA mortgage generally carries a $200 to $250 processing fee and an “Up-Front” mortgage insurance premium (UFMIP) that’s equal to one and a half months of ongoing mortgage payments.
In addition, there is an annual MIP (mortgage insurance premium) ranging from one to three percent of the loan amount. This is added to the loan each year until the loan balance reaches eighty percent of the home’s value.
If you were hoping to profit on your property once you sell, FHA mortgages might not be a good thing for you. This is because the FHA requires that borrowers meet an 80% LTV (loan-to-value ratio). This means that even if you sell your property for an amount higher than the current balance on your loan, you will still be responsible for paying the remainder.
Is an FHA Mortgage the Right Choice For You?
FHA mortgages are not the perfect solution for everybody. If you are looking for the lowest possible interest rate, you should know that FHA mortgages generally have higher rates than conventional loans. If you are a borrower who is not likely to follow through on a loan commitment, you should know that an FHA mortgage comes with strict guidelines and penalties for missed payments.
If you are counting on appreciation to pay off your mortgage, you should know that the FHA is not likely to allow you to exceed the eighty percent loan-to-value ratio. If appreciation is lost, you will be responsible for the remaining balance.
In general, however, FHA mortgages are a good option for first-time buyers and borrowers looking for a loan with lower requirements – especially if your credit is not up to the standards of a traditional lender. In addition, FHA mortgages are a good choice for younger homebuyers looking to build their credit.
Many home buyers are turned off by the higher interest rates and up-front fees commonly associated with FHA loans. However, if you are looking for a loan with lower requirements, you should investigate this option.
If you cannot qualify for a conventional loan, an FHA loan could be your ticket to homeownership. We recommend checking with an FHA-approved lender today if this sounds like your situation.
Learn your loan options with the help of Hawkins Home Loans. We are one of the best mortgage lenders in the Sacramento area that can help provide resources for a stress-free lending process. Get in touch with us today to know more.